Friday, July 18, 2014

There's no knowing...

Do the implications of any of the following statements make good sense to you?

1. Bears keep calling for a 10% correction in stocks, and they've been wrong time and time again.
2. Bulls keep talking about how cap-ex (businesses investing in capacity) is about to take off, and it just doesn't seem to come.
3. Bond bears, and conservatives, keep calling for higher inflation and falling bond prices, and it just isn't happening.

On #3, here's my favorite NY Times op-ed columnist this morning:
Rick Santelli, one of the network’s stars, is best known for a rant against debt relief that arguably gave birth to the Tea Party. On this occasion, however, he was ranting about another of his favorite subjects, the allegedly inflationary policies of the Federal Reserve. And his colleague Steve Liesman had had enough. “It’s impossible for you to have been more wrong,” Mr. Liesman declared, and he went on to detail the wrong predictions: “The higher interest rates never came, the inability of the U.S. to sell bonds never happened, the dollar never crashed, Rick. There isn’t a single one that’s worked for you.”

You could say the same thing about many people. I’ve had conversations with investors bemused by the failure of the dollar to crash and inflation to soar, because “all the experts” said that was going to happen. And that is indeed what you might have imagined if your notion of expertise was what you saw on CNBC, on The Wall Street Journal’s editorial page, or in Forbes.

And this has been going on for a long time — at least since early 2009. Yet despite being consistently wrong for more than five years, these “experts” never consider the possibility that there might be something amiss with their economic framework, let alone that Ben Bernanke, Janet Yellen or, for that matter, yours truly might have been right to dismiss their warnings.

I happened to have witnessed the recent rant Krugman refers to and, indeed, it was quite the rant. And while I generally sympathize with Santelli's thinking, Liesman was spot on. The problem the Santelli's, Stockman's and Schiff's of the world have is their proclivity for fortune telling. Rather than simply proclaiming the long-term adverse potentialities of present-day monetary policy, they predict outcomes with red-faced passion. And, by the way, the redder the face, typically, the wronger---for the time being---its wearer be.

Better to explain that money-printing by itself won't stoke inflation (by its popular definition) unless or until the new money starts moving through the economy (trading excess reserves for treasuries and mortgage backed securities does not by itself create velocity of money). Or until it provokes the outside world to, in a big way, transact outside the dollar. For now, the dollar remains solidly the world's reserve currency.

Now, among other factors that could show up in the price of a potato, or computer, chip are input prices at the manufacturing level (they've been rising), the extent to which factories are using their capacity (it's been hanging around just below its long-term average) and wage growth against slowing productivity (not scary at this point).

I happen to think (as opposed to know) that the risk of rising inflation is greater (but not necessarily great) today than its been at anytime over the past few years---and that the Fed risks falling a bit behind the curve. But that's all you'll get from me---a thought, a concern, but no knowing.

Back to my question: Does it make good sense to imply that what's occurring today, with regard to financial markets or the economy, will continue to occur ad infinitum? In the face of history strongly suggesting no, so many "experts" (of all, Krugman should know better) say yes. I suspect (not predict) Liesman and Krugman will one day be on the other end of 'see, I told you so'...

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